Lessons From German Reunification

Visitors look at the North Korea’s Kaepoong area from the unification observatory post near the border village of the Panmunjom.

By Harriet Torry

The recent change of leadership in Pyongyang has rekindled discussion over the issue of when the two halves of the Korean peninsula will become a single country again.

South Korea’s Unification Ministry said last week it would look to the experiences of German reunification this year as part of practical preparations for a unified Korea.

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The German experience is the closest historical precedent for what will eventually happen to North and South Korea. That doesn’t mean it provides a direct template for Korea, but there are some useful lessons from German reunification.

1. Saving now is a good idea. Estimates on the cost of German reunification vary but tend to put the figure around 1.5 trillion euros, and the West continues to support the East with transfer payments of about 100 billion euros annually. (South Korea’s Unification Ministry said last week it would set up a fund this year for unification, but gave no details of the size or who would pay into it.)

2. Reunification takes a long time. Kick-starting the East German economy has taken 23 years and counting.

3. South Korean taxpayers will inevitably have to fund transfer payments. German taxpayers continue to foot the bill for the East’s multi-decade bailout with a 5.5% “Solidaritätszuschlag” or solidarity tax on income.

4. Don’t introduce currency union too soon, and definitely not at a 1:1 exchange rate. One Deutsche Mark was worth about four Ostmarks in 1990, but currency union set a 1:1 rate, since the alternative would have meant massive migration. Overvaluing the currency, however, meant East German industry collapsed as wages became uncompetitive, leading to massive unemployment.

5. If wealth doesn’t come to North Korea, North Koreans will come to the wealth. East Germans migrated to the West in droves after the Wall fell. Many of those that left were the young, talented people needed most to rebuild and populate its economy. Many who left to work or study were also female. The hoards of unemployed, loveless young men left behind have caused social problems like a low birth rate and right-wing extremism.

6. The Berlin Wall fell, but the “Wall in People’s Heads” remained. Following the joyful celebrations, stereotypes of Besser Wessis [Westerners who know better] and Jammer Ossis [complaining Easterners] emerged. Four decades of communism had a huge cultural impact which proved difficult to adapt to capitalism. Officially neither unemployment nor private property existed in East Germany prior to 1990. The state subsidized rent, heating and childcare, and the majority of East German women worked full-time. Many struggled to adapt to the capitalist system, despite Germany’s generous social welfare system. Pining for the days of communism became known as “Ostalgie,” a nostalgia that sparked films, books, kitsch hotels and even themed stores selling communist-era groceries.

7. Opportunities Abound. East Germany is catching up, if more slowly than expected. Berlin is a hub of cultural, artistic and IT activity, and draws visitors from all over the world. East Germany has islands of entrepreneurial growth and presents opportunities that conservative, settled West German regions lack.

8. Things are getting better. The East’s 10.6% unemployment rate remains higher than the West’s 6.6%, but it’s falling. Winding down transfer payments without cutting off economic growth in East Germany is the next challenge.

9. It’s worth it in the end. Who can forget the moving images of rapturous Berliners streaming across the Wall, tearfully embracing friends and family? The Solidaritätszuschlag might have been unpopular at its inception, but few voices are raised against it now. German reunification is widely seen as “the right thing” to have done.

10. Reunification could up your influence. German reunification increased its size, population — and power.